Question

Suppose that Richland and Prosperity have the output figures shown in the table below. AVERAGE PRODUCT PER WORKER Wheat 3 bushels or 1 bushels or Richland Prosperity Wine 1 barrels 2 barrels Assume that cost and productivity remain constant. Round your answers below to 2 decimal places. a. What is the opportunity cost of producing one bushel of wheat in Richland? 1 bushel of wheat = 0.33 barrels of wine. b. What is the opportunity cost of producing one barrel of wine in Richland? 1 barrel of wine = 3 bushels of wheat. c. What is the opportunity cost of producing one bushel of wheat in Prosperity? 1 bushel of wheat = 2 barrels of wine. d. What is the opportunity cost of producing one barrel of wine in Prosperity? 1 barrel of wine = 0.5 bushels of wheat. e. In which product does Richland have a comparative advantage? Richland: Wheat f. In which product does Prosperity have a comparative advantage? Prosperity: Wine g. Fill in the missing production possibilities data for both countries in the table below. Assume that each country has a total of 10 million workers. g. Fill in the missing production possibilities data for both countries in the table below. Assume that each country has a total of 10 million workers. E 0 Wheat Wine 10 RICHLAND'S PRODUCTION POSSIBILITIES (millions of units) A B C D 30 22.5 15 7.5 0 2.5 7.5 PROSPERITY'S PRODUCTION POSSIBILITIES (millions of units) A B с D 10 7.5 5 2.5 0 5 10 15 E 이 Wheat Wine 20 Suppose that both countries are presently producing combination C. h. Fill in the blanks in the table below. Wine TOTAL OUTPUT IN MILLIONS OF UNITS Wheat Richland 151 Prosperity 5 Total: Both countries 20 5 10 15 Now suppose that each country specializes in the product in which it has a comparative advantage. i. Show the results in the table below. Wheat Wine 0 30 Richland Prosperity Total: Both countries 0 20 30 20 j. What is the joint gain from trade? Wheat and Wine j. What is the joint gain from trade? Wheat and Wine Suppose that the two countries establish the terms of trade at 1 wine = 2 wheat, and Richland decides to export 15 wheat to Prosperity. k. In the table below show how the two countries will share the gain or loss from trade. Round your answers below to 1 decimal place. GAINS FOR EACH COUNTRY IN MILLIONS OF UNITS Wheat Wine Richland Prosperity

Answer 1

Opportunity cost is key in determining comparative advantage, which allows countries to gain from trade by specializing in goods they produce more efficiently. The example provided illustrates how Richland and Prosperity can benefit by focusing on wheat and wine respectively, trading to achieve higher total output.

Step-by-step explanation:

The opportunity cost of producing a good is what must be given up to produce that good. It is crucial in determining comparative advantage, which is when a country can produce a good at a lower opportunity cost than another country. For example, if Richland produces 3 bushels of wheat or 1 barrel of wine per worker, the opportunity cost of 1 bushel of wheat is 0.33 barrels of wine and that of 1 barrel of wine is 3 bushels of wheat. Conversely, if Prosperity produces 1 bushel of wheat or 2 barrels of wine per worker, the opportunity cost of 1 bushel of wheat is 2 barrels of wine while that of 1 barrel of wine is 0.5 bushels of wheat.

According to these figures, Richland has a comparative advantage in wheat based on its lower opportunity cost, and Prosperity has a comparative advantage in wine. By specializing and trading based on these advantages, both countries can enjoy gains from trade. The capacity for greater total output and the ability to consume beyond their own production possibilities exemplify these gains.

If we assume that both Richland and Prosperity have 10 million workers and decide to establish a trade where 1 wine equals 2 wheat, we can calculate the gains from trade and see how each country will benefit by specializing and exchanging goods.